Allocate capital between two Bathinda food lines
Before the decision
The existing plant can handle either format after one packaging upgrade. A buyer offered a preliminary volume commitment for institutional packs. The lender wants a working-capital estimate before the packaging upgrade proceeds.
The problem
Should the team choose Institutional packs or Consumer packs for the next 12 months?
Decision owner: The business unit lead.
Institution bids pay slower, and consumer packs need more inventory across flavours.
Option economics
Scroll the table to see all figures.
| Option | Volume (cases) | ₹ per unit | Fixed cost | Net contribution |
|---|---|---|---|---|
| Institutional packs | 1,90,000 | 57 | ₹83 lakh | ₹25.3 lakh |
| Consumer packs | 2,45,000 | 43 | ₹72 lakh | ₹33.35 lakh |
Make the call
- Calculate net contribution for Institutional packs and Consumer packs. Which assumption makes the comparison most fragile?
- If the leading option delivers 10% fewer cases, does your recommendation change?
- What evidence would you ask for before the team makes an irreversible commitment?
Reveal the worked solution
Start by validating Consumer packs. It contributes ₹33.35 lakh after fixed costs and leads by ₹8.05 lakh. Treat that gap as the amount of unmodelled cost or lost contribution the option can absorb before the ranking reverses.
- Frame the decision
Compare the alternatives using the same period and test the cost of committing scarce resources. Check working capital and cash timing separately before funding either option.
- Calculate both options
Institutional packs: 1,90,000 cases × ₹57 less ₹83 lakh in fixed costs gives ₹25.3 lakh. Consumer packs: 2,45,000 cases × ₹43 less ₹72 lakh in fixed costs gives ₹33.35 lakh.
- Stress-test the forecast
Consumer packs leads by ₹8.05 lakh in the base case. If Consumer packs delivers 10% fewer cases (2,20,500) at the same margin and fixed cost, it contributes ₹22.82 lakh. Holding the other option constant, the stressed result falls behind. This isolates volume risk. Check whether both options would respond to the same change in demand.
- Set a decision threshold
Holding the other option’s result fixed, Consumer packs needs at least 2,26,280 cases to match or beat it under the model. Model working capital under both channels and inspect payment histories.
Institution bids pay slower, and consumer packs need more inventory across flavours. Compare the cost of a limited test with the loss the business would face if the full commitment failed. Ask the team to agree the decision criterion before collecting more evidence.
Check whether your answer names the trade-off, cites a number from the exhibit and specifies a reversal condition.
What if the whole market moves?
The worked solution tests a change to one option at a time. Here, both options gain or lose the same percentage of volume. Unit contribution and fixed costs stay constant.
| Volume scenario | Institutional packs | Consumer packs | Higher contribution |
|---|---|---|---|
| Both lose 10% of volume | ₹14.47 lakh | ₹22.82 lakh | Consumer packs |
| Base assumptions | ₹25.3 lakh | ₹33.35 lakh | Consumer packs |
| Both gain 10% of volume | ₹36.13 lakh | ₹43.89 lakh | Consumer packs |
Explain which option you would take forward. Check whether capacity, price or customer mix would also change as the market moves.
Practise this case as an interview